UK banks left vulnerable by Bank of England and politicians

City analysts have criticised the Bank of England's handling of the Britain's
banking sector and warned that Bank and Government policies have left major
lenders vulnerable if the eurozone debt crisis spreads to the UK.

UBS analysts warned the lack of an emergency scheme from the central bank to support the banking system in the event of a new crisis had already raised funding costs.Photo: Alamy

The Bank's refusal to contemplate new support programmes for UK banks has left them with "few or no backstops", according to UBS analysts.

Their doubts over the Bank's policy comes as questions are raised about the central bank's fitness to take on new powers of oversight for the financial system.

The accountability of the Bank has become a major political issue. Senior politicians, including Andrew Tyrie, chairman of the Treasury Select Committee, have said that moves to hand it responsibility for regulating Britain's largest banks must be balanced by increased public scrutiny of its actions.

In a report published on Tuesday, UBS analysts warned the lack of an emergency scheme from the central bank to support the banking system in the event of a new crisis had already led to rapidly rising funding costs for lenders.

Bonds sold last week by Barclays and Lloyds Banking Group show, the analysts said, that British banks are having to pay a higher price than European rivals with access to cheap European Central Bank (ECB) funding to issue new debt.

Barclays had to offer investors 4.25pc to sell a 10-year bond secured against the bank's assets. This is 2.15 percentage points - or 215 basis points - more than the equivalent estimated borrowing cost for the UK government.

By comparison, despite market concerns about solvency, French banks have been able to issue debt at more attractive rates due to the ECB's recent opening of a new three-year borrowing facility for eurozone lenders.

On the same day Barclays sold its bond, Societe Generale sold its own 10-year covered bond at a rate of 4pc, a tighter 180 basis point spread over the French government's borrowing cost.

The impact of this on the economy has been profound. UBS says five-sixths of British private sector workers are employed by companies with no access to the bond market, while bank lending to the UK economy continues to decline.

While recent Bank of England figures show a decline in Britain's trade deficit, UBS said the authorities were ignoring "the lost GDP from the inappropriately high cost of debt".

"The trade deficit is mainly shrinking thanks to people not taking holidays abroad any more. That certainly smells less of rebalancing; more of the nation just getting poorer," said UBS.

Government attempts to make British banks safer are also panned in the UBS report, with the increased cost of funding and the collapse in the share prices of major lenders cited as "clear signs of distress" among the UK's largest banks.

"For all the billions put into bank capital by taxpayers and stockholders; and for the all the dramatic reversals in wholesale funding needs and liquidity positions, no durable equilibrium looks close," warned the analysts.

UBS said the Bank should consider restarting the Credit Guarantee Scheme (CGS), which was set up in the wake of the 2008 of bail out of Lloyds and Royal Bank of Scotland in October 2008. The Bank has insisted it will phase out the scheme at the end of this year when the remaining £50bn of debt issued using it matures.

Germany and Italy have established their own debt guarantee schemes to support domestic lenders.